Payments to the IRS May Be Avoided as Fraudulent Transfers
By Michael Enright, Robinson & Cole LLP
The U.S. Court of Appeals for the Ninth Circuit recently held that the trustee of a plan trust may avoid as fraudulent transfers $17 million in tax payments made to the IRS by the debtor. The trustee used the Idaho UFTA and Section 544(b)(1) of the Bankruptcy Code to avoid the fraudulent transfers. The IRS defended on the basis of sovereign immunity, asserting that the trustee had to show that Congress intended to abrogate sovereign immunity for the underlying Idaho UFTA claim, even though Section 106(a)(1) abrogates sovereign immunity for Section 544(b)(1) actions. In re DBSI, Inc., No. 16-35597 (9th Cir. Aug. 31, 2017) held that Section 106(a)(1) unambiguously abrogates sovereign immunity under these circumstances, declining to follow In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014), and setting up a circuit split. Trustees now will even more carefully scrutinize tax payments for potential avoidance, at least in the Ninth Circuit.